Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

According to the text, the Fed and other policymakers are concerned about:

Graphically the intersection of the aggregate demand curve, the short-run and long-run aggregate supply curves determines:

Refer to the accompanying figure. An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ________ creating ________ gap.

The self-correcting property of the economy means that output gaps are eventually eliminated by:

When actual output exceeds potential output there is ________ output gap and the rate of inflation will tend to ________.

Exogenous changes in spending refer to changes in planned spending:

Which of the following will shift the aggregate demand curve to the left?

If policymakers deem inflation as being too high, then the policy response should be monetary ________, which shifts aggregate demand ________.

When actual output is less than potential output, there is ________ output gap and the rate of inflation will tend to ________.

At short-run equilibrium inflation ________ and output equals ________.

The short-run aggregate supply curve shows ________ while the long-run aggregate supply curve shows ________.

Refer to the accompanying figure. An economy in short-run equilibrium at point A has a(n)________ gap. The gap could be eliminated by the self-correcting mechanism of the economy and eventually achieve long-run equilibrium at point ________ or the central bank could intervene with monetary easing establishing the long-run equilibrium at point ________.

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

Graphically an increase in the short-run aggregate supply line represents a(n)________, and a shift leftward of the long-run aggregate supply line represents a(n)________.

When no output gap exists actual output ________ potential output and the rate of inflation will tend to ________.

Low expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

Refer to the given figure. ________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ________ shifts ________.